Japan’s recession comes just nine months after the world’s third-largest economy suffered a record-breaking decline in activity of nearly 8% in the second quarter of 2020.
Falling household consumption was the main reason behind the shrinkage, with the postponement of the Olympic Games and the weak demand for Japanese manufacturing goods extra bearing growth.
Although the quarterly reduction of 7.8% in gross domestic product was the steepest decline since similar modern records began in 1980, Japan did less poorly than other G7 countries during the coronavirus pandemic.
Official figures released by the Tokyo government showed that action taken to combat the spread of the pandemic had taken its toll on consumer spending, but business investment had held up relatively well.
By comparison, the UK economy shrank by 20.4% in the three months to June – comfortably the worst performing of the G7 group of industrialized countries. Of the remaining members, the US contracted with 9.5%, Germany with 10.1%, Italy with 12.4% and France with 13.8%. A flash estimate put Canada’s decline at 12%.
The recession of Japan began in late 2019 when growth was hit by an increase in sales tax, but deepened in the first half of 2020. The recession brought the gains from the era of ‘Abenomics’ – the pro-growth policy introduced by the prime minister’s prime minister, Shinzō Abe, eight years ago.
Analysts expect Japan’s economy to start growing again in the third quarter, but say the country’s recovery is vulnerable to increased trade tensions between the US and China. Washington and Beijing called off the final round of talks over the weekend.
Saisuke Sakai, a senior economist at the Mizuho Research Institute, said:
“There is a chance that economic activity could stagnate if large nations re-adopt lockdown measures if Japan re-issues a state of emergency.”
A breakdown of Japanese GDP showed external demand – as exports minus imports – shook a record 3.0 percentage points of growth in the second quarter. Overseas shipments tumbled 18.5%, with auto exports hitting particularly hard.
Falling global retail outlets have hurt motorists such as Mazda and Nissan, among Japan’s biggest drivers of the economy.
Economy Minister Yasutoshi Nishimura admitted that the GDP readings were “quite serious”, but pointed to some bright spots such as a recent pickup in consumption.
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Marcel Thieliant, the senior Japan economist at Capital Economics, said second-quarter growth figures were already old news and he expected activity to return.
“We already know that the volume of retail sales was almost back to pre-virus levels in June, although spending on many service activities was declining rapidly. And although the country is in the middle of a second wave of Covid-19, the health care system is not yet overwhelmed and new infections have begun to decrease again.
“Given the strong business balance, the generous credit guarantee scheme and the low confidence in tourism, we think Japan will recover faster than most expected. We recorded the third quarter in a 4.5% rebound in GDP and expect the economy to expand by 3.5% in 2021; well above the consensus of 2.6%. ”
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